"You need more cowboy"
Limited Partner series, part three.
Read: 5 minutes | Listen: 8 minutes
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Good morning, Bright Builders.
This is part three of the Limited Partner series. The first two handed you checklists. The hard questions to ask developers AND the signals to stop trusting.
This one is different. No checklist today. Just a window into how I actually weigh risk, and why the way I weigh it has cost me real money.
So…
Let me tell you about a lunch.
A few months back I had lunch with another developer. Bigger firm than mine. Big portfolio. He’s focused on senior housing right now, but he’s been a prolific multifamily guy for years. This is not some lightweight. He knows his stuff cold.
We did what developers do these days. We complained about the market.
You know the conversation. “Man, I thought things would have turned by now. I thought we’d be building multifamily again.” Both of us a little tired. Both of us watching deals that don’t pencil.
And we got to talking about the firms in our market who are still building right now. Still putting shovels in the ground. Even though, by our math, the deals don’t work.
Here’s the argument I always make. Your numbers are my numbers, give or take. We’re looking at the same rents, the same construction costs, the same interest rates.
If a deal were close, I’d get it. Maybe you’ve got an in-house general contractor and you can shave the fee. Maybe there’s one little tweak that gets a borderline deal over the finish line. Fine.
But we’re not close. We’re a mile away.
In Minneapolis right now, net operating income has to climb something like twenty percent for new multifamily to be viable. That’s not a tweak. That’s several years of strong rent growth with flat expenses. That is a long, long way from where we sit.
So I was sitting there lamenting all of this. And my friend looked at me and said:
